Some may face penalty for shunning health insurance

Prisoners, people objecting on religious grounds among exemptions to law

Massachusetts has had a similar penalty system in place since 2007

Washington (CNN) -- The health care law signed Tuesday by President Obama is projected to extend insurance coverage to roughly 32 million additional Americans, but what happens to those who don't get themselves covered by health insurance?

The new law creates penalties in the tax code as an incentive.

An adult who does not have health insurance by 2014 would be penalized $95 or 1 percent of income, whichever is greater, so long as the amount does not exceed the price tag of a basic health plan. But by 2016, the penalty increases to $695 for an uninsured adult, and up to $2,085 per household, or 2.5 percent of income, whichever is greater.

A person would also be penalized only if he or she went more than three months of the year without insurance.

Some people are exempt from the new law. If a person's income is below a certain level, or if the cheapest insurance would cost 8 percent of the person's income, no penalty would apply for lack of coverage.

There also are exemptions for people in prison, people objecting on recognized religious grounds and for members of Native American tribes.

The rules were spelled out over the weekend by the Joint Committee on Taxation, which includes both Senate and House members.

The yet-to-be-implemented system might like the one in Massachusetts, which has had a similar penalty system in place since 2007. In Massachusetts, taxpayers are required to prove they had insurance by completing a three-page section of the state income tax form.

The Massachusetts tax form instructs taxpayers to mark any months when there was no health care coverage. There is also a place to write a reason for no coverage, such as low income or religious beliefs.

Massachusetts reported fining around 45,000 taxpayers for 2008, 1.5 percent of all tax filers, with penalties of up to $1,100 per person.

Republicans including Rep. Kevin Brady, R-Texas, warn that the Internal Revenue Service could need as many as 16,000 additional agents to implement all the provisions of the new law.

"This bill is so complicated, has so many mandates, has so many new taxes," Brady said, "that the IRS is going to again be more deeply involved in our lives than ever before."

The Democratic position is that similar worries were heard before the IRS was instructed to implement the Earned Income Tax Credit, yet the program ended up running relatively smoothly.

Obama has argued that the only fair way to make insurers cover everyone, even the most expensive patients, is for everyone, even the healthiest patients, to be required to join the insurance pool.

For most violations, like failure to pay taxes, the IRS can enforce penalties by imposing liens on taxpayers and by garnishing wages. But for health coverage penalties, according to the Joint Taxation committee, there is currently no provision for collection under health care reform, other than reminder letters or subtracting a penalty from any refund a taxpayer is owed.